Supreme Court to Decide Fate of Online Sales Tax as Georgia Readies to Start Collection
For 26 years, buyers and sellers of goods across state lines have relied on a major roadblock to requiring out-of-state sellers to collect sales taxes—the Supreme Court’s 1992 decision in Quill v. North Dakota. That decision held that out-of-state sellers do not have to collect state sales taxes if they do not have a physical presence in the state. This rule has been interpreted to mean that businesses must have a “bricks and mortar” operation in the state to be subject to sales tax collection.
Online sellers do not have a physical presence in most states, although a few online retailers, such as Amazon, have decided to cooperate with states anyway to collect sales tax on their products. With online sales growing 17% per year, reaching almost $460 billion in 2017, this rule is costing states a huge amount of revenue. Estimates place uncollected online sales tax revenues at $13 billion in 2017.
Now, the Supreme Court is poised to reconsider its previous rule and has scheduled oral arguments for April 2018 in the case of South Dakota v Wayfair (Also joined in the case is Overstock.Com, Inc., and online computer seller Newegg, Inc.), a direct challenge to the Quill physical presence test. At issue in the case is a South Dakota law enacted in 2016 which requires remote sellers to register with the state and collect sales tax if they exceed certain sales thresholds in South Dakota.
The 2016 law, Senate bill 106, requires out-of-state sellers to collect and remit sales taxes on sales to South Dakota residents if either: 1) The remote seller’s gross revenue from in-state sales exceeds $100,000; or 2) the remote seller has 200 or more separate transactions in South Dakota. The South Dakota Supreme Court struck down the law as violating Quill, and the state has appealed to the U.S. Supreme Court. South Dakota has no income tax, and so relies heavily on sales taxes for its revenue base.
Physical Presence and Nexus
Can states require out-of-state sellers to collect and remit sales and use tax?
Yes, if the remote seller has “nexus” with the taxing state. This is a complex legal and constitutional question.
What is ‘Nexus’? From Latin, nexus means ‘a binding together.’
In state taxation ‘nexus’ is the connection a taxpayer has with a state that allows the state to exercise its taxing powers.
Georgia Jumps into the Fray
Thirty-four states are supporting South Dakota’s actions, and the Georgia Legislature is positioning the State to start online sales tax collections as soon as the Wayfair case is decided. Georgia HB 61, first introduced in 2017, would expand the “nexus” concept in Georgia by relying on a “substantial economic presence test” for remote sellers. Under the bill, out-of-state businesses would be considered to have nexus in Georgia if they have:
- $250,000 of in-state sales in total in the previous year
- 200 or more in-state transactions per year.
Sellers would be required to collect and remit Georgia sales tax or notify purchasers in Georgia that they must file and pay the use tax. (Use taxes are imposed on and payable by buyers as an alternative to sales tax collections.) Also under the bill, annual sales and use tax statements would go to buyers and must be filed with the Georgia Department of Revenue. Passage of HB 61 could mean an extra $500 million to $600 million a year in sales tax collections for the state. The Georgia law also is a direct challenge to Quill’s physical presence test, and, until the Supreme Court hands down its Wayfair decision, there will be legal uncertainty about the enforceability of any final version of the Georgia bill.
Outlook and Implications
The “Kill Quill” movement has been gaining steam for the last few years as states have been systematically passing laws to develop a test case to challenge Quill in the Supreme Court. Now, South Dakota has succeeded in getting to the highest court. Congress has indicated some support for online sales tax collections by passing the Marketplace Fairness Act in 2013 in the Senate. The House never took up the bill, and congressional action has stalled. Congress appears to be waiting for the courts to resolve the issue.
President Trump said during his campaign, “Amazon is getting away with murder, tax-wise.” Vice President Mike Pence has expressed support for federal nexus legislation. Public opinion seems to support the idea, as national polls find that 7 out of 10 people support e-fairness legislation. (streamlinedsalestax.org) More significantly, Amazon has conceded the nexus issue and is now collecting online sales taxes. Other large sellers may follow Amazon and stop fighting.
What will the Supreme Court do? At least one Justice has indicated his possible position. In 2010, Colorado enacted an economic presence/notice and reporting requirement that was upheld by the 10th Circuit Court of Appeals in Direct Mktg. Ass’n v. Brohl (2016). The parties ultimately settled, and the U.S. Supreme Court declined to review the constitutional nexus issue in that case but did rule on a procedural matter. In that review, Justice Anthony Kennedy invited a challenge to Quill, suggesting it was time to revisit the physical presence test. Here’s what he said:
From Justice Kennedy
” …a serious, continuing injustice faced by Colorado and many other States.”
“…dramatic technological and social changes…in our increasingly interconnected economy. There is a powerful case to be made that a retailer doing extensive business within a State has a sufficiently substantial nexus to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet.”
“When the Court decided Quill, mail order sales in the United States totaled $180 billion. …But in 1992, the Internet was in its infancy. By 2008, e-commerce sales alone totaled $3.16 trillion per year in the United States.”
The momentum favors the states, so both consumers and online retailers should get ready for state sales tax on all online sales. Sellers will need to develop compliance systems to calculate, collect, and remit taxes collected on internet sales. Consumers will no longer be able to shop around to find sources that do not charge state sales tax and may have to pay use tax themselves.